The Short Report

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

By Andrew Nelson

Before we continue, it must be noted that stockbroker RBS Australia has highlighted some recent issues with the short position data put out by ASIC, given some technical difficulties. In fact, the errors have caused the broker to cancel its own weekly short position note this week. FNArena's own Short Report, here following, has been produced in good faith and with the presumption of accuracy, but if ASIC is having problems then readers must be warned the following data may prove erroneous. Errors may also explain the sudden plunge in short positions highlighted in last week's Report, followed by an equally sharp reinstatement in this week's Report. Please take this into account as you read on.

It may also be a good opportunity for readers to reacquaint themselves with the "Important Information" that follows below the tables at the bottom of all Short Reports.

Last week’s Short Report was a big one for short position decreases, with nary a company increasing its short position by any sort of noticeable amount. Once again, Newton’s third law comes to the fore. For every action there is an equal and opposite reaction, in this case a massive amount of short position increases in this week's Report, with hardly a move to the downside over the week to 23 October 2012.

For weekly increases, we’ll use a cut-off of 3 percentage points (ppt) or greater. For the downside, well there isn’t that much that we’ll even need a rule, with no moves over 1ppt booked over the period.

Flight Centre ((FLT)) booked the biggest ticket, its short position taking off 8.04ppt from 4.66% to 12.7% over the course of the week in question. The move puts the stock near the top of the Top 20 most shorted list, moving from outside the list to the number four position. Earlier in the month it was alleged that Flight Centre attempted to induce three airlines to enter into price-fixing arrangements so it could maintain its commissions, according to the ACCC. The stock none the less remains positively regarded in the FNArena Database, with six Buy call versus two Holds.

Mineral sands miner Iluka ((ILU)) finds itself next on the list, with its short position rising 7.84ppt from 4.48% to 12.32%. Brokers rated the company’s quarterly on the 12^th of the month, with most finding both production and current market dynamics uninspiring. The stock still maintains a positive footing in the database, with five Buys and three Holds. There was one Buy at the beginning of the period, but Macquarie downgraded to Hold on the 12^th, with the broker seeing risks for both sales volumes and prices to the downside.

There’s a big gap to number three, with David Jones ((DJS)) seeing its short position rise 5.55ppt from 3.41% to 8.96%. There has been no substantial broker commentary on the company since September, with the database still reflecting a slightly negative rating.  Fellow discretionary retailer The Reject Shop ((TRS)) finds itself next on the list, with shorts increasing 5.07ppt from 5.32% to 10.39%. Last week Credit Suisse reiterated its Sell call, although it noted the prospect of significant potential upside to come from a now accelerated store rollout program. The database also shows a Hold and a Buy, leaving the stock a flat neutral in the database.

Yet another discretionary retailer finds itself near the top of the list, with shorts in JB HiFi ((JBH)) rising 4.92ppt from 16.97% to 21.89%, cementing the stock’s position at number one on the Top 20 list. The stock is just a little shy of being neutrally regarded, with UBS last week lauding the company’s new product pipeline leading into Christmas.

Western Areas’ ((WSA)) short position rose 4.63ppt from 2.6% to 7.23% after putting out a very well received September quarter report last week. The stock remains positively regarded in the FNArena Database, with five Buys and three Holds. JP Morgan has the stock as its top nickel pick.

Perennial Top 20 favourite Lynas Corp ((LYC)) is next, with its short position pushing 4.11ppt higher from 9.33% to 13.44%. Up until the beginning of the month the stock enjoyed a somewhat positive reputation in the database, but both Macquarie and Deutsche downgraded to Sell on the 11^th of October, with Macquarie actually coming down from a Buy. The stock now enjoys just one Buy from RBS versus two Sell and two Holds. The problem facing the company and forcing the downgrades is a never ending series of legal battles in Malaysia to get the LAMP project up and running. Most brokers are confident it will happen at some point, bit the interminable delays increase the need for an equity raising on a daily basis.

Pharmaceutical company Acrux ((ACR)) follows, with its short position up 3.77ppt from 1.32% to 5.09%. The stock enjoys one Buy and one Hold in the database, with RBS lifting to Buy in September on valuation grounds. Online travel retailer Wotif.com ((WTF)) saw its short position lift 3.44ppt from 2.15% to 5.59%, with broker handing in mixed reviews on the company’s recent move to list the commission rates it charges. Some see it a positive and necessary move, while others worry it may strain relationships with suppliers. The stock is fairly neutrally regarded according to the database, with one Buy, five Holds and two Sells.

Ten Network ((TEN)) saw its short position rise by 3.16ppt from 5.12% to 8.28%, with FY results falling short of most broker estimates a couple of weeks back. Consensus was trimmed and most brokers don’t expect to see much until the ad cycle starts to turn. There was a note out from Deutsche Bank last week to report the company had managed to sell its EyeCorp business for $110m, which provides a bit of space on the balance sheet and reduces the risk of an unwanted capital raising. The stock remains negatively regarded in the database, with one Buy, three Holds and four Sells.

No short position was more than 1ppt lower last week, with the biggest decrease over the period a 0.94ppt decline for Centro Retail ((CRF)) from 1.11% to 0.17%. The stock remains neutrally regarded in the database, with UBS saying a few weeks back that it liked moves to bring some syndicates back on to the balance sheet.

One of the biggest moves on the Top 20 list was booked by Paladin ((PDN)), down from 5^th to 11^th spot. CSR ((CSR)) moved from 8th to 14th and Mesoblast ((MSB)) went from 9th to no position on the latest rankings. Monadelphous ((MND)) also dropped off the list from 16th spot, while The Reject Shop lifted from 14th to 7th.

On a monthly basis, there were a number of moves greater than 2bps, both to the upside and downside. Fairfax saw its short position advance 3.56ppt from 11.58% to 15.14% over the monthly period and while not really relevant to the timeframe we’re discussing, it is interesting to note the company’s AGM gave broker’s a little confidence, with some signs of a minor trading improvement. The stock remains neutrally regarded in the database, with more than 53% upside to the consensus target.  

Also booking a big monthly increase was Matrix Composites ((MCE)), whose short position advanced 3.21ppt from 1.09% to 4.3%. Again, while not germane to the period we’re looking at, it’s worth noting JP Morgan upgraded its call to Buy from Hold on bad news yesterday, reasoning that most of the bad news must now surely be behind us.  

On the upside, Linc Energy’s ((LNC)) short position decreased 3.63ppt from 6.96% to 3.33%, while APA Group’s ((APA)) short position pulled back 3.01ppt from 5.51% to 2.5% over the monthly period. Credit Suisse said a couple of weeks back that while APA looks fully valued at current levels, a 7.4% yield is on offer, with good prospects of increasing. Linc is positively regarded in the database, while APA rates a flat neutral.
 

Top 20 Largest Short Positions

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

Technical limitations

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